March 21, 2007 10:01 AM PDT

What the Tellme deal says about Microsoft

Microsoft has been spending a lot of time talking up the notion of "software plus services," but the company still has a whole lot of software and not too many services.

It's been more than 15 months since Bill Gates and Ray Ozzie touted a "Live" services push, but many company watchers are still waiting to hear a more clear strategy for how Microsoft plans to compete with advertising-funded rivals like Google and subscription-based companies like Salesforce.com.

Last week's deal to buy Tellme Networks, however, could help add more substance to its rhetoric.

"Tellme does things that Microsoft hasn't traditionally done," said Charles Moldow, a former senior vice president of sales for Tellme and now venture capitalist at Foundation Capital. "Tellme doesn't ship software. Tellme sells a service."

That service allows businesses to run voice-activated telephone systems without having to install their own servers. Tellme hosts the set-up from its data centers and gets a small fee for each call that it handles. Microsoft offers a competing product--Speech Server--but it is sold in the traditional Microsoft way: Companies buy a license for the server software and run it on their own equipment.

The fact that Tellme has a different business model was part of its allure, said Microsoft Business Division president Jeff Raikes.

"One of the many benefits that we're excited about with our acquisition of Tellme is that they bring with them a proven hosted service business," Raikes said in an e-mail.

For some months now, Microsoft has been saying that businesses aren't going to want to get software only as a hosted service. Instead, it argues customers want a mix of traditional software and hosted products, something the company has dubbed "software plus services."

Adding a service-based option is a good thing for Redmond, but Moldow said it still could be challenging. "I think it's a huge plus, but you have to get your head around it," he said.

In a speech at Stanford University last week, CEO Steve Ballmer acknowledged that adjusting to new business models is one of the toughest tasks he has faced in running the software giant.

"Learning a new business model or developing a new business model is so hard," Ballmer told a crowd of business students.

Indeed, most of the business services Microsoft offers today have come through acquisitions. Microsoft's Placeware acquisition is now the Live Meeting service, while FrontBridge Technologies is now Exchange Hosted Services.

But the company has also quietly added a variety of other services as well. In some cases, Microsoft plans to offer the services itself, while in other areas it is letting third parties do the hosting. With its Exchange Server e-mail software, for example, Microsoft makes it easy for partners to offer the software on a monthly subscription basis. Some 20 million mailboxes are handled in that way.

A "raw deal" for Microsoft?
Microsoft also has been testing a service in which large companies hand over desktop support duties to Microsoft. The effort, at one time part of Microsoft's internal IT department, is now part of the Server and Tools business and is known as Microsoft Managed Services. It handles duties for at least two companies, Energizer Holdings and XL Capital.

Recently, Ballmer said the company also plans to test a more limited service in which Microsoft hosts Exchange, SharePoint and Office Communication Server for large customers. Rosoff said he expects Microsoft to begin offering some service commercially from the managed service effort sometime this year.

The software giant has also announced plans for a hosted version of its CRM product as well as for a variety of "Live" services for consumers and small businesses.

There's actually quite a bit Microsoft has been doing in this area, said Matt Rosoff, an analyst with market researcher Directions on Microsoft. "In some cases Microsoft gets a raw deal when it comes to online services," he said. "Everyone assumes Microsoft doesn't get online services. I think they do."

In some ways, Microsoft was ahead of its time in thinking about the shift of software. The company held a strategy meeting in the mid-1990s on how it needed to rework its business for the coming change.

"Software as a service was a theme of a company meeting nine or 10 years ago where we heralded the idea that packaged software was done and now it was just all going to be shipped over the Internet," Chairman Bill Gates said in a 2005 interview with CNET News.com. "In fact, like many things around the Internet that were predicted to happen quickly, they are simply things that take more time."

But others argue that the time for such services arrived some time ago and say that Microsoft is late to the party.

For his part, Rosoff said that Microsoft appears to be adding services where they make sense and that he doesn't see the company dramatically shifting its business.

"It's safe to say the vast, vast majority of revenue still comes from software licenses," said Rosoff. "I don't actually expect that to change."

See more CNET content tagged:
Tellme Networks Inc., Jeff Raikes, business model, Steve Ballmer, acquisition

9 comments

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What I don't understand:
How does Microsoft expect customers to adopt its new products and services when they're so unhappy with the Microsoft products and services they already have? Microsoft has an entrenched "monopoly" mindset, and they need a major shift in thinking if they want to win customers for new products.
Posted by fcekuahd (244 comments )
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What I don't understand...
Microsoft gets a bad wrap about having bad software. I actually used to do Microsoft support and in almost every case the software or network or something was not configured properly and caused problems. No software is going to work as designed if all the pieces aren't configured properly. Most successful Microsoft shops take the time and effort to make sure things are configured properly. Not always, but most of the time Microsoft provides a very good value for the software they offer in terms of features and benefits.
Posted by jmissild (6 comments )
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I guess you are speaking for yourself...
Does Microsoft offer up the best product everytime? No. Does Microsoft try to bring creativity to its stack? Heck yeah! Yes, Vista takes up more resources? Why? More capability built into the OS - sidebar and the wealth of other security features tend to help customers, not hurt them. With everyone getting hot and bother by security (and rightfully so) over the last 10 years Microsoft has changed the methodology for developing secure product. This is increasingly difficult to do when you are the largest target on a hackers list. Nothing is bullet proof - nothing ever will be bullet proof!

As long as Microsoft continues to create solid products with a unified user interface and a basic look across all products customers will win in the end.

MAK and KMS and Vista Keys, Office Keys in general work to thwart the mass amount of rampent anti-piracy in the industry. This is not a challenge that's unique to just Microsoft, it just so happens that Microsoft is so close to 100% market satuation they find themselves looking to recoup the vast amounts of lost revenue sooner then the competition out there.

With TalkBack I think Microsoft is continuing to make acquisitions which will help position itself against competitors like Cisco - offering more solution as services is a good direction - bravo to Microsoft for making the step - customers and the market in general are demanding it.

And as a side note, name one company who exists to not continue to drive its stock price up? Sure, not everyone is exactly happy that Microsoft is offering more options for customers to try and gain more business but let me know of a company that has a better track history of integrating new acquisitions within its business at such a rabid acquisition pace?
Posted by jessiethe3rd (1140 comments )
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I think you're in the minority
Most Microsoft customers are fed up with Microsoft.
Posted by aabcdefghij987654321 (1721 comments )
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Google
Google
Posted by t8 (3716 comments )
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Here in lies MS problem.
Do you milk your traditional business for billions at the risk of letting companies like Google become the online leaders, or do you cannibalize your own business and go full throttle into hosted applications thereby eating into your software market, but ensuring that you are a leader in the new paradigm.

Microsoft has obviously chosen to stick to their traditional business with a bit of online extension to appear Internet savvy.

Micorosoft's traditional business as lucrative as it is, is based around legacy products and so history repeats itself. This is what happened to IBM.

The Telco industry face the same dilemma. Do they avoid VOIP and milk the copper lines for as much as you can, or offer VOIP to compete with their traditional phone systems (thereby losing revenue) but ensuring your place when the paradigm inevitably changes.
Posted by t8 (3716 comments )
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